How Cisco's Weak Guidance Gives Investors an Opportunity in Disguise
Telecom gear maker Ciena has been in pullback mode for the last month or so. Shares are down 20% since late October, as Ciena has been feeling the effects of sorry guidance by networking and telecom bellwether Cisco .
Cisco's bane, Ciena's pain
Cisco shares had taken a big hit early in November after it missed revenue estimates for the first quarter. To make things worse, Cisco guided for an 8%-10% decline in revenue for the current quarter. This sparked fears of a slowdown in telecom and networking spending, triggering a 13% drop in Cisco's share price. According to Reuters, at least 17 brokerages cut their price targets on Cisco, while Goldman Sachs removed it from its conviction list.
Since Cisco is the leading technology equipment supplier, its weak performance weighed in on other equipment makers as well, and Ciena was one of them. But does Ciena deserve to be a part of Cisco's pain? Probably not. Cisco suffered because sales in the emerging markets slowed down in the wake of the recent surveillance allegations, as most of the data is routed through Cisco's equipment.
As such, the problems seem Cisco-centric rather than industry-centric. In my opinion, it does not make sense to sell Ciena over its competitor's problems. Ciena has been doing very well and, despite the recent pullback, shares are up around 40% this year. It has been performing well ahead of expectations and the trend looks set to continue.
A slew of catalysts to drive growth
Ciena will be reporting its fourth-quarter results on Dec. 12, and then it can put the negativity surrounding it to rest, once and for all. Ciena shares had soared in September after it reported outstanding third-quarter results -- and a repeat could be in the cards.
Ciena's order book grew at a faster pace than revenue on a sequential basis in the previous quarter, as it saw design wins with several Tier 1 customers across the globe. Ciena has been finding good traction in Europe, along with emerging economies such as Brazil and India. Recently, Cablevision Argentina, a leading cable TV and Internet service provider in Argentina, selected Ciena to upgrade its broadband network across the country.
The order backlog that Ciena has built is expected to translate into revenue from the current quarter onward. Management expects to see revenue from several international Tier 1 customers during the fourth quarter.
In the domestic market, Ciena counts the two biggest telecom companies -- Verizon and AT&T -- as customers. AT&T is still building out its LTE network, while Verizon has already finished doing so. However, Verizon is looking to make its network more efficient by deploying a large number of small cell sites in place of larger cell sites.
Verizon management had stated earlier this year that the company will start deploying small cell sites in the second half of 2013, and Ciena could expect to gain from this. Also, Verizon's small cell deployment stresses the fact that telecom spending isn't just limited to network build-out, as telecoms need to keep spending to keep networks in top shape.
In addition, according to Ovum Research, optical network spending in North America grew in the third quarter. Also, Dell'Oro Group's research reveals that Ciena dominated the wavelength division multiplexing market in North America, a market that has grown 20% in the last three quarters.
Don't miss this opportunity
Such positive developments enabled Ciena to issue a strong guidance. It expects revenue in the range of $550 million-$580 million, comfortably ahead of the $551 million consensus estimate.
If Ciena manages to hit the mid-point of the revenue target, it would translate into year-over-year growth of around 20%. In addition, earnings are expected to improve to $0.24 per share from a loss of $0.07 per share last year. As such, investors should consider capitalizing on Ciena's recent weakness as the company is well-positioned to report solid growth figures and, hopefully, a good outlook once again.
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The article How Cisco's Weak Guidance Gives Investors an Opportunity in Disguise originally appeared on Fool.com.Fool freelancer Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.